Ireland:
Central Bank Clarifies Rules On Ability Of Irish Funds To Gain Exposure To Digital Assets
26 April 2023
Dillon Eustace
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On 4 April 2023, the Central Bank of Ireland (Central
Bank) published a revised edition of its Q&A on AIFMD and its Q&A on UCITS in which it set out its
revised position on the ability of Irish domiciled funds to gain
exposure to "digital assets", often referred to as
"crypto assets".
It is worth noting at the outset that the Central Bank has made
clear that for the purposes of its guidance, "digital
assets" refers to digital assets which are based on an
"intangible or non-traditional underlying" and does not
include investments which are tokenised traditional assets whose
value is linked to an underlying traditional asset or pool of
assets. Digital assets falling within the scope of the Central Bank
rules will therefore for example include investments in crypto
currencies or NFTs1.
The table below sets out the Central Bank's revised rules on
investment in digital assets.
Type of Fund
|
Type of Exposure to Digital Assets
|
Central Bank Position
|
Requirements imposed by the Central Bank
|
All QIAIF Funds
|
Direct exposure
|
Not permitted until it is satisfied depositary safe-keeping
rules can be satisfied
|
- Pre-submission required which includes details from the
proposed depositary demonstrating how it is satisfied that it can
safekeep the digital assets in accordance with the safe-keeping
rules set down in the Irish AIFM Regulations.
|
Open-ended QIAIF
|
Indirect exposure
|
Permitted subject to applicable conditions being met
|
- Effective risk management arrangements addressing all risks
relevant to investment in digital assets which at a minimum should
include liquidity, credit, market, custody, operational, exchange
risk, money laundering, legal, reputational and cyber risk.
- Appropriate stress testing based on "extreme yet
plausible" scenarios.
- Effective liquidity management arrangements.
- Transparent prospectus disclosure containing a "clear
articulation" of relevant risks.
- Alignment between redemption profile, level of investment in
digital assets and likelihood of illiquidity in such assets.
- An open-ended QIAIF can gain indirect exposure to digital
assets of up to 20% of NAV without being required
to make any pre-submission to the Central Bank.
- Pre-submission to the Central Bank is required if proposed
exposure is in excess of 20% of NAV.
|
Closed Ended QIAIF/Open Ended QIAIF with Limited Liquidity
|
Indirect exposure
|
Permitted subject to applicable conditions being met
|
- Effective risk management arrangements addressing all risks
relevant to investment in digital assets which at a minimum should
include liquidity, credit, market, custody, operational, exchange
risk, money laundering, legal, reputational and cyber risk.
- Appropriate stress testing based on "extreme yet
plausible" scenarios.
- Effective liquidity management arrangements.
- Transparent prospectus disclosure containing a "clear
articulation" of relevant risks.
- Alignment between redemption profile, level of investment in
digital assets and likelihood of illiquidity in such assets.
- A closed-ended fund or an open-ended fund with limited
liquidity can gain indirect exposure to digital assets of up to
50% of NAV without being required to make any
pre-submission to the Central Bank.
- Pre-submission to the Central Bank is required if proposed
exposure is in excess of 50% of NAV.
|
UCITS Funds
|
Direct exposure/Indirect exposure
|
Exposure to digital assets not currently permitted
|
N/A
|
RIAIF Funds
|
Direct exposure/indirect exposure
|
Exposure to digital assets not currently permitted
|
N/A
|
In a separate development relating to investment in tokenised
traditional assets, under amendments made to the Irish MiFID
Regulations2 which became effective on 23 March 2023,
the definition of a "financial instrument" now includes
any "financial instrument" listed in Schedule 1 to the
Irish MiFID Regulations which is issued by means of distributed
ledger technology. This paves the way for Irish funds to now
potentially invest in tokenised financial instruments subject to
applicable product rules.
Footnotes
1. Since July 2022, the Central Bank had permitted Irish
QIAIFS to invest up to 10% of net assets in cash-settled Bitcoin
futures traded on the Chicago Mercantile Exchange without any
requirement to make a pre-submission to the Central Bank. However,
the revised Q&A on AIFMD published on 4 April 2023 provides for
the potential to invest in a much broader range of digital assets
subject to the conditions imposed by the Central Bank being
satisfied.
2. European Union (Markets in Financial Instruments)
(Amendment) (No.4) Regulations
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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